PREPARED BY :GROUP B

NEED:
y Lease is an arrangement by which the lessor gives the

right to use an asset for given period of time to the lessee on rent.

OBJECTIVE:
y To prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating lease.

SCOPE
y To explore for or use natural resources, such as oil, gas,

timber, metals and other mineral rights; and y Licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights; and y Lease agreements to use land

PARTIES:
y Lessor (owner of the asset) y Lessee (get right to use asset)

TYPES OF LEASE

FINANCE LEASE
y Transfers all risks and rewards substantially to y y y y y

the ownership of the assets (i.e. to lessee) Ownership at the end of lease term (to lessee) Lessee has an option to buy leased asset(price lower than its expected fair value) Lease term covers major part of the life of asset. Specialized nature asset Lessee can use asset without major modification.

OPERATING LEASE
y Risk and rewards does not transfer y y y y

substantially to ownership. For short period. Can be cancelled by giving notice. Assets in respect of which technology changes. Lessor liable for expenses.

TERMS & EXPLANATIONS
(1) GUARANTEED RESIDUAL VALUE: y In respect of lessee: such part of residual value, which is guaranteed by or on behalf of the lessee. y In respect of lessor: such part of residual value, which is guaranteed by or on behalf of the lessee or by an independent third party.

(2) UNGUARANTEED RESIDUAL VALUE Residual value ² Guaranteed residual value y RESIDUAL VALUE Estimated fair value of the asset at the end of the lease term. y FAIR VALUE Amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm·s length transaction.

(3)CONTIGENT RATE Portion of the lease payment that is not fixed in amount but is bases on factor other than just passage of time. Example:% of sales, amount of usage, price indices, market rate of interest.

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